If you play your cards right, your most valuable asset in retirement will not be your home. It won’t even be the guaranteed lifetime income stream from Social Security, valuable though that “asset” may be — assuming the Social Security system stays solvent, of course.
Rather, your most valuable asset in retirement will likely be your IRA. Surprised? Most people think of IRAs as trifling little accounts because the maximum annual contribution is just $4,000, or $5,000 for people over 50. Saving $4,000 a year won’t make you rich — in fact, it won’t even prepare you adequately for retirement. But your IRA at retirement could end up holding far more than those annual contributions (which, it must be emphasized, do add up and should not be abandoned).
Rather, your IRA will hold all the 401(k) and pension balances you’ve accumulated during a lifetime of work. If you open an IRA rollover account when you leave your first job and have your retirement plan assets transferred into it, you won’t have to pay taxes or penalties on the distribution. Furthermore, those assets can keep growing tax-deferred. Then if you do it again when you leave your second job, and again when you leave your third job, and so on and so on and so on, by the time you retire you could have a nest egg worth well into six figures or more. Add to that any inherited IRAs you may receive from parents or other relatives, and you’ll be looking at a sizable sum which, if managed properly, will support you throughout retirement.
Managing your IRA is only a little more complicated than managing your 401(k) or a regular taxable investment account. For one, you’ll have many more investment choices compared to most 401(k) plans. As your account grows in size, you will likely want to do more sophisticated planning. With a self-directed IRA you can branch off into investments that may be more suitable for your changing objectives.
Compared to managing a regular taxable investment account, you’ll need to know the rules associated with IRAs, such as when and how you can take distributions, when and how you must take distributions, and how to stretch out distributions to minimize the tax bite to yourself and your family. You should also know the rules associated with tax-free Roth IRAs, including the income limits for establishing a new Roth or converting an existing IRA to a Roth. In 2010 the income limits will be lifted, so we are recommending that everyone establish a traditional IRA now (contributory or rollover) with the idea of possibly converting to a Roth in 2010.
Despite tweaks in the rules over the years, IRAs remain one of the best tools for accumulating assets for retirement. For more information, please contact me.
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